Last December there was a funny story about how the grandson of Italian Prime Minister got nicknamed “spread” by the other kids in school.
The reason the kids called him that is that Monti himself has been publicly obsessed with the “spread”, the difference between Italian borrowing costs and German borrowing costs.
German 10-year bonds yield 1.60%. Italian bonds yield 4.46%. So the spread is just over 280 basis points. The spread was MUCH higher than when Monti took power in late 2011, but the gap is still large. Italy is still paying a large penalty in public markets for being Italy.
At the time of the original story, this just seemed like an example of how Mario Monti was the ultimate banker’s prime minister, talking about technical market measures, rather than the numbers that matter to real people (like jobs).
And there is truth to that.
But this morning in Milan I got to speak to some very senior investors at a major asset management company (so they could speak freely about politics, etc., they ask that they not be identified) and it became clear that the “spread” is everything in the eyes of the government, and those professionally invested in the economy.
Here’s why. Italy spends 4.5% of GDP on interest on its debt. Italy actually doesn’t run a very big deficit each year, but its total debt is enormous (owing in large part to debts incurred in the 80s). With such a massive burden of debt, and because so much of the government spending goes to paying down debt, reducing the spread really is seen as the holy grail in their eyes.
It’s not just about ending an acute crisis, but freeing up cash to invest, maintain social programs, jobs, etc.
The investors I talked to noted that Belgium has debt dynamics very similar to Italy, but because the “spread” is so much lower, its total debt burden is much less big of a deal.
The obsession here is: Gaining credibility (through more political stability), reducing that spread, and then having the cash available to improve the economy.
The big fear is that this weekend’s election will make the government less stable, harm credibility, and make spread reduction difficult.